Hons III Year Income Tax Law PracticeH Final

B.Com (Hons.
) III Year Subject- Income Tax Law & Practice
SYLLABUS
Class – B.Com. (Hons.) III Year
Subject – Income Tax Law & Practice
Unit-I General introduction of Indian income tax act, 1961. Basic

concepts: income, agriculture income, casual income previous
year, assessment year, gross total income, total income, person
assessee, residential status and tax liability, exempted income.
Unit-II Income from salary, income from house property.
UNIT – III Computation of taxable income from business of profession.

Capital gains, income from other sources.
UNIT – IV Set off and carry forward of losses: Deduction from gross total
income – with special reference to section 80C, 80D, 80G, 80-
1A and 80-1B.
UNIT – V Procedure for computation of total income (taxable income) of

individual. Income tax rates applicable for individual’s
computation of total income and tax payable.
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B.Com (Hons.) III Year Subject- Income Tax Law & Practice
UNIT-I
Indian Tax System & Income Tax Law
Taxation is the major Instrument in the hand of the modern Governments to raise finance to
meet expenditure done on various public services. It is a compulsory obligation on the peoples
and the payment of which is the legal duty of the citizens. It may be on their property. Income and
even it may be required to pay at the time of manufacturing and selling or purchasing a
commodity. Tax constitute the major source of the government’s income.
SALIENT FEATURES OF INDIAN TAX SYSTEM

1. Three Tire Tax System
2. Various Types of Taxes
3. Important sources are in hands of the Central Government
4. Composition of Tax Structure
5. Modrate Rates of Taxes
6. Direct and Indirect Taxes
7. Public Revenue and National Income
8. Local Finance
9. Elasticity in State Revenue
10. Integration between Central and State Revenue
11. Incidence of Taxation
12. Tax Evasion and Corruption
IMPORTANT DEFINITIONS
GROSS TOTAL INCOME
Gross Total Income means aggregate amount of taxable income computed under five heads of
income i.e. salaries, house property, business & profession, capital gains and other sources. In
other words, Gross Total Income means total income computed in accordance with the
provisions of the Act before making any deduction under sections 80C to 80U.
In Simple words, the aggregate amount of the following heads of income is called Gross Total
Income –
(i) Salaries (Cash receipts and perquisites from the employer),

(ii) Income from House Property (Rental income)
(iii) Profits an Gains of Business or Profession,
(iv) Capital Gains from transfer of movable and immovable assets,
(v) Income from other Sources i.e. interest, royalty, lottery etc.
TOTAL INCOME
The following are the current rates of taxation for an individual, Hindu, Undivided Family, firm,
company and co-operative society for the assessment year 2018-19.
Basic concepts of Income Tax

Meaning of Income Tax
Income tax is a tax on year taxable income of a person levied by the Central Government at
prescribed rates. Tax payers include individual, firm, company, Hindu undivided family,
association of persons, trust etc. Taxable income means income calculated under the
provisions of the Income Tax Act.1961
Salient Features of Income Tax-

1. Central Tax
2. Direct Tax
3. Tax on Taxable Income
4. Progressive rates of Tax
5. Scope of Taxation not only with individual but also with firm, company, HUF, Trust & Co-
Operative Societies
6. Tax Exemption limit
7. Burden on Rich class persons
8. Separate Administration
9. Distribution of Tax between Central and State Government
10. It is largest source of revenue.
11. Tax for country welfare
12. History of income Tax in India is about 150 years old.
13. Control on Income by Income tax
14. Beginning of Income Tax by sir James Wilson in 1860 in India.
Income [Section 2(24)]
Though ‘Income’ is a very important word for the Income Tax Act but no precious definition of
the word “Income” is attempted under the Income Tax Act, 1961. The term “Income”, in the
context of the Act, in inclusive. The narrion given in Sub-Section (24) of Section 2 of the Act
enumerates certain items, including those which cannot ordinarily be considered as income but
are treated satutorily as such.
Definition of Income [Section 2(24)]
Income Includes:-
1. Profit and gains;

2. Dividend;
3. Voluntary contributions received by a trust.
4. The value of a perquisite o profit in lieu of salary.
5. Any special allowance or benefit other than perquisites included under 4.
6. Any allowance granted to the assessee either to meet his personal expenses at the place
where the duties of his office
7. The value of any benefit or perquisite obtained from a company.
8. Any compensation
9. Profit on sale of License
10. Cash assistance received
11. Any interest, salary, bonus, commission/remunerations
12. Profit/gain of mutual or co-operative insurance co.
13. Capital gain arising from transfer of capital gain
14. Any sum received under a key man insurance police.
Agricultural Income [Section 2

(1A)] Definition of Agriculture
Income
Sec. 2(1A) defines “agricultural income” to means –
(A) any rent or revenue derived from land which is situated in India and is used for
agricultural purposes,
(B) any income derived from such land by agriculture or by the process employed to
render the produce fit for the market or by sale of such produce by a cultivator or
receiver of rent in kind,
(C) Any income derived from any building provided the following conditions are
satisfied (i) The Building is immediate vicinity of the agriculture land (ii) it is
occupied by the cultivator or received of rent or revenue (iii) It is used as a
dwelling house or store house/out house. (iv) The land is assessed to land revenue
or a local rate.
(D) Any income derived from saplings/seedling grown in a nursery shall be deemed to
be agricultural income.
Partly Agricultural Income Shown by Chart

S.No. Partly Agricultural Income Agricultural Non
Income Agricultura
l Income
1 Growing & manufacturing tea in India 60% 40%
2 Growing & cured coffee in India by 75% 25%
the seller
3 Sale of Coffee grown, cured, roasted 60% 40%
and grounded
4 Sale of centrifuged latex or 65% 35%
cenex manufactured from
rubber
5 Other Agricultural produce grown by Market value of Remaining
the manufacturer and used for own agricultural Business income
product. produce used will be taxable.
in production
Income connected with land but not agricultural income –
1. Profit earned on purchasing the standing crop.

2. Income from mines
3. Income from self grown grass, trees/bamboos
4. Divided from a company engaged in Agricultural
5. Income from warehouses and godowns.
6. Income from land used for brick making
7. Income from supply of water for irrigation purposes.
8. Remuneration for managing agricultural property.
9. Income from dairying.
10. Interest accrued on promissory notes executed for arrears of rent.
Agricultural Income and Tax Liability –
Though agricultural income is exempt and it is not included in computation of total income of
an assessee but from tax calculation point of view it is added to total income. The agricultural
income is integrated with non-agricultural income in those cases where assessee has both
incomes. Such integration is done only in the case of individual, HUF, AOP/BOI and Artificial
juridical person.
Condition for Integration -
When the following two conditions are satisfied-
(i) Non agricultural income of the assessee exceeds the maximum exemption limit
which for the assessment year 2018-19 is Rs. 2.5 lakh in the case of an individual,
Women and HUF in case of Senior citizen it will be Rs. 3,00,000 and Super senior
citizen Rs. 5,00,000 instead of Rs. 2,50,000/-.
(ii) Net agricultural income exceed Rs. 5,000
Procedure for computation of Tax-payable an non-agricultural income after Integration-
1. Aggregate the Agricultural income with non Agricultural income and determine the tax
payable on such amount.
2. Aggregate the Agricultural income with basis exemption limit and determine the tax
payable on such amount.
3. The difference between the tax computed in step (a) and step (b) will be the tax payable
in respect of non-agricultural income.
CASUAL INCOME
Causal Income means such income the receipt of which is accidental and without any
stipulation. It is the nature of an unexpected windfall.
Though causal income is fully taxable but it is necessary to clear this meaning from the
following point of view –
1. Causal income like lottery, race income are taxable at special rate of 30%
2. Causal income cannot be set off against other causal income as well as casual income
cannot be used for setting off loss of other head.
4. ASSESSMENT YEAR : (2018-2019)
It means the period of twelve months commencing on 1 st of April every year. In other words
period of 12 months – 1st April to 31st March is called assessment year.
5. PREVIOUS YEAR (Section 3)(2017-2018)
Previous year means the financial year immediately preceding the assessment year e.g. for
the assessment year 2018-2019 previous year will commence on 1 st of April, 2017 and end
on 31st March, 2018. Previous year for income tax purposes will be financial year which ends
on 31st of March, however the assessee can close his books of accounts on other date e.g. an
assessee may maintain books of accounts on calendar year basis but his previous year, for
Income Tax purpose, will be financial year and not the calendar year. This uniform previous
year has to be followed for all sources of income.
Important points in relation to previous year: Under the following situation the previous
year would be -
1. Where a different accounting year is followed

2. Previous year in case of newly set up business
3. In case of newly created source of income
Exception to the rule of Previous
Year: These exceptions are:
1. Shipping business income of non-resident ship-owners

2. In case of persons leaving India
3. In case of persons who are likely to transfer their assets to avoid tax
4. In case of discontinued business
PERSON [SECTION-2 (31)]

The term ‘person’ includes:
(1) An individual
(2) A Hindu undivided family
(3) A Company;
(4) A Firm;
(5) An association of persons or a body of individuals, whether incorporated or not;
(6) A local authority like Municipalities, Panchayats, Cantonment Boards, Port Trusts
etc.
(7) Every artificial juridical person Like Life Insurance Corporation, University etc.
ASSESSEE [SECTION-2 (7)]

In simple word, An Assessee is a person who is liable to pay any sum under Income Tax Act or in
respect In respect of whom the proceeding have been initiated under this Act.
The word ‘assessee’ has been defined in Section 2(7) of the Act according to which
assessee means a person by whom any tax or any other sum of money is payable under the Act
and includes –
(a) Every person:

(i) Who is liable to pay any tax; or
(ii) Who is liable to pay any other sum of money under this Act (e.g. interest, penalty, etc); or
(iii) In respect of whom any proceeding under this Act has been taken for the
assessment of the income; or
(iv) In respect of whom any proceeding under this Act has been taken for the
assessment of the income of any other person in respect of which he is assessable;
or
(v) In respect of whom any proceeding under this Act has been taken for the
assessment for the loss sustained by him or by such other person; or
(vi) In respect of whom any proceeding under this Act has been taken for the amount of
refund due to him or to such other person;
(b) A Deemed Assessee:
A person who is liable to pay tax not only on his own income but on the income of any
another person. Deemed assesses includes legal representative, agent of non resident,
guardian or manager of an infant and lunatic, trustees and administrators etc.
(c) Who is deemed to be an assessee in default?
A person is said to be an assessee in default if he fails to comply with the duties imposed
upon him under the Income tax Act.
GROSS TOTAL INCOME

Gross Total Income means aggregate amount of taxable income computed under five heads of
income i.e. salaries, house property, business & profession, capital gains and other sources. In
other words, Gross Total Income means total income computed in accordance with the
provisions of the Act before making any deduction under sections 80C to 80U.
In Simple words, the aggregate amount of the following heads of income is called Gross Total
Income –
(vi) Salaries (Cash receipts and perquisites from the employer),

(vii) Income from House Property (Rental income)
(viii) Profits an Gains of Business or Profession,
(ix) Capital Gains from transfer of movable and immovable assets,
(x) Income from other Sources i.e. interest, royalty, lottery etc.
TOTAL INCOME
The following are the current rates of taxation for an individual, Hindu, Undivided Family, firm,
company and co-operative society for the assessment year 2015-16.
BASIS OF CHARGE (TAX RATE)
Tax Rates –
Applicable tax rates for the
Assessment Year 2018-19(Previous
year 2017-2018) are as follows –
1. Tax rates applicable on individual and HUF (less than 60 years)–
Incom Tax
e Rate
On First Rs. 250000 NIL
On Next Rs. 250001 to 5,00,000 5%
On Next Rs. 5,00,001 to 1000000 20%
On above 10,00,000 30%
2. Resident senior citizen Assessee (Whose age is 60 year or more but less than 80
years) Male or Female
Incom Tax
e Rate
On First Rs. 3,00,000 -
On Next Rs. 3,00,001 to 5,00,000 5%
On Next Rs. 5,00,001 to 10,00,000 20%
On above 10,00,000 30%
3. Super Senior Citizen Assessee (80 years or more)
Incom Tax
e Rate
On First Rs. 5,00,000 -
On Next Rs. 5,00,001 to 10,00,000 20%
On above 10,00,000 30%
4. Partnership firm - 30% flat Rate on Income of firm.
5. Domestic Company –Domestic Company 30% flat rate on income if income is more than Rs.
1 Crore then 5% Surcharge & 10% surcharge in case exceed of 10 Crore is also applicable on
tax payable.
6. Foreign Company –Foreign Company 40% flat rate on income if income is more than Rs. 1
Crore then 5% Surcharge & 10% surcharge in case exceed of 10 Crore is also applicable on tax
payable.
7. Co-operative Society –
Income Tax
Rate
On First Rs. 10,000 10%
On Next Rs. 10,000 20%
On remaining 30%
balance
8. Tax Rate on special income-
a. Long term capital gain 20%
(Flat)
b. Short term capital gain (U/s 111A) 15%
(Flat)
c. Income on lottery, horse race, Cross word Puzzle 30%
etc. (Flat)
9. Education Cess – 3% Education Cess is applicable on taxable Income of all type of assessee
but in case of company education cess is applicable after adding of surcharge (if any).
INCOME WHICH DOES NOT FROM PART OF TOTAL INCOME
EXEMPTED INCOME
Section -10 of Income Tax Act laye down income which is totally or partially exempted
from tax-
A. EXEMPTED INCOME FOR ALL ASSESSES

1. Agricultural Income Sec. 10(1)
2. Share of income from partnership firm Sec. 10 (2A)
3. Share of HUF Income Sec. 10(2)
4. Scholarships – Sec.10(16)
5. Income as divided Sec. 10 (34 & 35)
6. Capital gain on transfer of u/s 64 (Sec. 10 (33)
7. Allowance of M.P./MLA Sec. 10 (17)
8. Award / reward Sec. 10 (17A)
9. Pension to gallantry award winner Sec. 10(18)
10. Family Pension received by the family members of armed forces Sec. 10(19).
11. Capital gain on compulsory acquision of urban Agriculture land Sec. 10(37)
12. Interest on notified Government Securities Sec. 10(15)
13. Income of minor child which is clubbed Sec. 10(32) [Up to 1,500/- per child]
14. Compensation under Bhopal Gas Leak Disaster Sec. 10(10BB)
15. Income of subsidy from Tea Board Sec. 10(30)
16. Income of schedule Tribe members Sec. 10(26)
17. Amount received under a life Insurance Policy Sec. 10(26)
18. Income of subsidy from Rubber Board/Coffee Board /spices board / any other notified
Board Sec. 10(31)
19. Income from Sukanya Samriddhi Account – Sec. 10(11)A.
B. EXEMPTED INCOME FOR EMPLOYEES
1. House Rent Exempted upto a certain limit Sec.10(13A)
2. a) Gratuity, Commuted pension, leave encashment to Government employees is fully
exempted Sec. 10(10)
b) Gratuity, leave encashment, commuted pension to non-government, employees is
exempted up to a certain limit.
3. a) Commutation of pension received by an employees pension for government
employees, fully exempted Sec. 10(10A)
b) Pension for non-government employee exempted upto certain limit.
4. Leave travel concession in India Sec. 10(5)
Actual Amount Received or
Amount Prescribed or Which ever is

less Amount Actual Spent
5. Amount received as leave encashment on retirement Sec.-10 (10AA)

a) Central/State Government Employee – Fully Exempted
b) Other Employee exempted upto certain limit
6. Compensation on retrenchment Exempted upto certain limit.Sec.10(10 B)
7. Allowance or perquisite outside India Sec 10(7)
8. Allowance/perquisite paid outside India by Indian Government is exempted.
9. Provident fund Sec. 10(11)
a) P.F. received from Recognised P.F. fully exempted
b) P.F. received from unrecognised P.F. Taxable
10. Superannuation fund Sec. 10(13)
11. Voluntary retirement Scheme Sec. 10(10c) (Amount received by this scheme is
exempted upto 5 lakh.)
12. Tax on perquisite paid by the employer is exempted Sec. 10 (10 CC)
13. Special Allowance Sec. 10 (14) (performing duty & compensatory allow).
1 Travel/Tour Allowance Actual or Actual Expanses
(Whichever is less)
2 Education Allowance 100/- Per month Per Child (for 2 child)
3 Hostel Allowance 300/- Per month Per Child (for 2 child)
4 Transfer Allowance 70% of Allowance
Or Whichever is
less 6,000 Rs. Per month
5 Conveyance Allowance Up to 1600/- Per month
6 Uniform Allowance Tax Free
7 Helper Allowance Actual Expenditure exempted
8 Tribal Area Allowance Up to 200 Rs. Per month
9 Field Area Allowance Rs. 2,600 Per month
10 Composite Hill Compensatory Allowance From 300 Rs. to 7000 Rs. Per month. according to
place
11 Border/Remote area allowance 200 to Rs. 1,300 Per month. according to place
12 Allowance to workers of coal mines Rs. 500 Per month
13 High Attitude allowance Rs. 1060 to Rs. 1600 Per month
14 Highly Active field area allowance Rs. 4,200 Per month
15 Modified field area allowance Rs. 1,000 per month.
16 Counter Insurgency Allowance Rs. 3,900 per month.
17 Transport Allowance Rs. 800 per month (Rs. 1600 per month in the case
of handicapped, blind or disabled employee) w.e.f.
01.04.15 Rs. 1,600 and Rs. 3,200 respectively.
18 Island (Duty) Allowance Rs. 3,250 per month.
C. EXEMPTED INCOME FOR INSTITUTIONS

1. Income of scientific research association Sec. 10(21)
2. Income of employee’s welfare fund Sec. 10 (23AAA)
3. Venture capital fund/Company Sec. 10 (23F)
4. Income of news Agency Sec. 10 (22B)
5. Income of Professional institutions Sec. 10 (23A)
6. Income of Regimental Fund of the Armed forces Sec. 10(23AA)
7. Income of Khadi/Village industrial Sec. 10(23B)
8. Income of Khadi Board Sec. 10(23BB)
9. Income of the European Economic Community Sec. 10 (23BBB)
10. Income of statutory bodies Sec. 10 (23 BBA)
11. Income of pension fund (Set up by LIC) Sec. 10 (23AAB)
12. Income from mutual fund Sec. 10 (23D)
13. Income of Registered Trade unions Sec. 10 (24)
14. Income of local authorities Sec. 10(20)
15. Income of Co-operative Societies for Scheduled castes/Tribes Sec. 10 (27)
16. Income of political party Sec. 13 (A)
17. Income of the SAARC fund for regional Project Sec. 10(23BBC)
18. Income of a corporation promoting the interest of a minority community Sec. 10 (26BB)
19. Income of certain national funds Sec. 23 (c)
20. Income of Hospitals and Educational Institution association Sec. 10 (23C)
21. Exemption of income of Investor Protection Fund – Sec. 10 (23EA)
22. Income of Swachh Bharat Kosh and Clean Ganga Fund – Sec. 10 (23C)
D. EXEMPTIONS FOR NON-RESIDENT /FOREIGN CITIZEN

1. Interest received on securities.
2. Interest received by “non-resident(External) Account”
3. Interest from notified central Government if such certificates are subscribed in foreign
currency.
4. Remuneration received by foreign diplomats.
5. Salary received by foreign citizen in India/by non-resident foreign citizen/by an
employee being a foreign national.
6. Tax paid by Government/Indian concern in case of non-resident/Foreign company.
7. Income arising to notified foreign companies projects connected with security of India.
8. Foreign allowance granted by the Indian government to its employee posted abroad.
9. Remuneration received from foreign government by an individual who is in India in
connection with any sponsored Co-operative technical assistance programme.
10. Remuneration received by non-resident consultants and their foreign employers.
E. EXEMPTIONS FOR OTHERS

1. Exemptions for newly established industrial undertaking in free trade zones Sec. 10 (A)
2. Exemptions for newly established industrial undertaking in special Economic Zone Sec.
10 (AA) after 31st March, 2005
3. Exemptions for newly established industrial undertaking Hundred percent
export oriented undertakings Sec. 10(B)
4. Deduction in respect of export of artistic hand made wooden articles section 10 (BA)
5. Income exempted of charitable/Religions trusts Sec.-11
RESIDENTIAL STATUS AND TAX LIABILITIES
The tax liability under income tax is determined on the basis of residential status of an
assessee but not according to the citizenship hence it becomes necessary that firstly the
residential status of an assessee should be determined.
On the basis of residential status there are 3 categories of assessees:
1) Resident/Ordinary resident
2) Not ordinarily resident
3) Non resident
There are separate rules for different types of assessee like; individual, H.U.F., firm, companies etc.
for determination of residential status.
Individual Assessee
1) Resident / Ordinary Resident : - If an individual wants to become resident in India,
then he has to fulfill the basic condition as well as two additional conditions:
i) Basic conditions: In the basic conditions, there are two conditions. On satisfying
any one of these, it will be assumed that the basic condition is satisfied.
a) The assessee must have lived for at least 182 days in India during the
previous year.
OR
b) The assessee must have lived for at least 365 days in 4 years
preceding the previous year and at least 60days in 4 years
preceding the previous year.
EXCEPTIONS TO THE BASIC CONDITIONS
1. If an assessee is an India citizen and goes aboard for the employment purpose or
leaves the country as a member of crew of an Indian ship.
2. If an assessee is an Indian citizen or an Indian origin, living in a foreign country and
comes to India on tour during the previous year.
In both these exceptional cases an assessee has to lives for at least 182 days for satisfying the
basic condition.
ii) Additional Conditions
There are two additional conditions and assessee has to satisfy both of these conditions. These
are :
i) An assessee must have been assessed as resident for at least 2 out of

10 years preceding the previous year.
AND
ii) An assessee must have lived for at least 730 days out of 7 year
proceeding the previous years.
Thus on satisfying any of the two basic conditions and two additional conditions an
individual assessee can be termed as “ordinary resident”.
2) Not Ordinarily Resident: If an assessee satisfies the basic condition but fails to
satisfy the two additional conditions, then he will be assessed as “not ordinarily
resident”.
3) Non Resident: If an assessee fails to satisfy even the basic condition, then he will be
assessed or” non resident”.
Hindu Undivided Family (H.U.F.)
1) Resident : An HUF will be assessed as resident in India if :
a) Management and control of the business is wholly/partly situated in India.
AND
b) “Karta” of the HUF satisfies the two additional conditions.
2) Not Ordinarily Resident : An HUF will be assessed as NOR if:
a) Management and control of the business is wholly/partly situated in India
BUT
b) Karta of HUF does not satisfy the two additional conditions.
3) Non Resident: An HUF will be assessed as non resident if control and management of
the HUF is wholly situated outside in India.
FIRM OR ASSOCIATION OF PERSONS
1) Resident :- A firm or an AOP will be assessed as Resident of India if its control and
management is wholly/partially situated in India
2) Non Resident : A firm or an AOP will be assessed as non resident in India if it is
wholly/partly controlled and managed from outside India.
COMPANY
1) Resident : A company will be assessed as resident in India if :
i) It is an Indian Company
OR
ii) It is controlled and managed wholly within India.

2) Non-Resident : A company which is neither an Indian company nor it is wholly/partly
controlled and managed from outside India, is called as non-resident.
RESIDENTIAL STATUS AND TAX INCIDENCE (LIABILITIES)
Tax liability of an assessee depends upon the residential status on which income he is liable to
pay tax and which incomes are not taxable for him, for determination of this matter, now we
have to understand the relationship between residence and tax liabilities :
a) Tax liability of Resident

i) Income received or deemed to be received in India.
ii) Income accrued or deemed to be accrued in India.
iii) Income received or accrued outside the India
b) Tax liability of Not ordinarily resident:
i) Income received or deemed to be received in India.
ii) Income occurred or deemed to be accrued in India.
iii) Income business situated outside India but controlled and managed from India
c) Tax liability of non residents:
i) Income received or deemed to be received in India
ii) Income occurred or deemed to be accrued in India.
UNIT-II
INCOME FROM SALARY
Computation of Income from Salary
Assessment Year 2018-19
(A) Cash Receipts

:- Salary -------------
Bonus -------------
Commissio -------------
n -------------
Allowances -------------
Advance Salary
-------------
Arrears of Salary
(B) (i) Employer’s Contribution in R.P.F.
-------------
(Recognized provident fund) in excess of
12% of salary -------------
(ii) Interest on R.P.F. in excess of 9.5% -------------
C) Perquisites:- -------------
Rent free house -------------
Medical facility -------------
Motor car
Education facility
Gross Salary
(---------)
Less:- Deduction u/s 16 (ii)
Entertainment allowance ……… …………..
Less:- Deduction u/s 16 (iii)
Professional tax ………
Taxable Salary
Deduction form Gross Salary
(1) Entertainment allowance u/s 16(ii) :- This deduction is allowable only to

government employees.
Salary = Basic Salary :-
(i) Allowance received

(ii) 20% of
Salary Whichever is less
(iii) Rs. 5000
(2) Professional Tax or Employment tax u/s 16(iii):-
Actual Payment will be deductible.
Allowance
s
Fully Taxable Allowance Fully Tax free allowance Partly Taxable
allowance
(1) City compensatory allowance 1) Conveyance allowance 1) Education allowance
(2) Dearness Allowance 2) Travelling allowance 2) Hostel allowance
(3) Deputation Allowance 3) Tour allowance 3) Tribal area allowance
(4) Entertainment Allowance 4) Helper or 4) Transport allowance
(5) Family allowance assistant 5) Composite
(6) High cost of living allowance allowance hill
(7) Medical Allowance 5) Academic and compensator
(8) Non-practicing allowance research allowance y allowance
(9) Overtime allowance 6) Uniform allowance 6) Running allowance
(10) Project allowance 7) Special allowance to the employees of
(11) Rural area allowance for performing transport
(12) Servant allowance duty. undertakings
(13) Tiffin allowance Above allowances will be 7) House rent allowance
(14) Warden and fully exempted if :- 8) Under
proctor (i) Whole amount is Ground
allowance spent Allowance
(ii) Amount is spent
for office use only
Rules regarding partly taxable allowance

1) Education allowance :- Exempted to Rs.100/- P.M. per child for maximum 2 children i.e.
100 × 2 × 12 = Rs. 2,400/-
2) Hostel allowance :- Exempted up to Rs. 300/- P.M. per child for maximum 2 children i.e. 300
× 2 × 12
= Rs. 7,200
3) Tribal area allowance:- Exempted up to Rs. 200/- P.M.

4) Transport allowance:- Allowance for going to office and coming back to home is
exempted up to Rs. 1600 P.M.
5) Composite hill compensatory allowance:-
(i) Manipur skim, U.P., H.P. and J & K where height is 9000 ft. and above Rs. 800 P.M. exempted
(ii) In Siachin area Rs. 7000 P.M. exempted.
(iii) Places located at a height of 1,000 meter or more above the sea level Rs. 300 per month.
6) Running allowance for employees of Transport undertakings
70% of allowance
received or
Whichever is less is exempted

Rs. 10,000/-
P.M.
7) House Rent allowance:-
Salary = Basic Salary + D.A. Under the terms + Commission at fixed percentage
Allowance received ----------------

Less:- Whichever
1) Allowance received ----------------
2) Rent paid – 10% of salary is less will be ----------------
3) 40% or 50% of salary ---------------- ----------------
Taxable H.R.A. ----------------
8) Under Ground Allowance : - Exempted upto Rs. 800 Per Month

Perquisites
Tax free perquisites Taxable
perquisites
1) Refreshment facility For all class of employers For Specified employers
2) Telephone facility 1) Rent free house 1) Servant facility
3) Medicinal facility 2) Concessional rent house 2) Gas, Water &
electricity facility
4) Expenses on Training 3) Liabilities of employee 3) Free education facility
paid by employer (exceeding Rs. 1000 P.M.
Per child)
5) Sale of goods as 4) Interest free or
concessional rate concessional loan exceeding
Rs. 20,000
6) Issue of 5) Use of movable assets
shares/debentures at [10% of cost will be
concessional rate Taxable]
7) Free Conveyance facility 6) Transfer of movable assets
[W.D.V. –Transfer price]
8) Free Accommodation for 7) Medical reimbursement
employees (exceeding Rs. 15000)
9) Scholarship to children
of employee
10) Leave travel concession
or
assistance
11) Loan facility up to 20000
12) Free use of computers
13) Free Education facility
up to Rs. 1000 P.M. per child
14) Health club and
sport facilities
15) Tax paid on perquisites
16) Group insurance and
accidental insurance
premium
paid by employer
17) Transfer of 10 year
old movable assets
18) Free meal upto Rs. 50
Rules Regarding Retirement
1. Monthly Pension - Fully Taxable

2. Computation of Pension –
(A) Government employee – Fully exempted
(B) Other employee
(i) If employee is getting Gratuity – 1/3rd of total pension will be exempted
(ii) If gratuity employee is not getting gratuity – ½th of total pension will be exempted.
3. Gratuity –
(A) Government employee – fully exempted
(B) Employee covered under gratuity payment 1972
Salary = Basic salary + Dearness allowance (which is under the terms of

employment or not)
Gratuity received ------------

Less :-
1. Gratuity received ----------
2. Salary last drawn x Service Year x 15 ---------- Whichever
26 (-) ----------
3. Maximum limit Rs. 10,00,000 ---------- is less
-
Taxable ------------
Gratuity
Note:- Salary will be calculated on the basis of last months receipts
(C) Employee not covered under Gratuity payment Act 1972
Salary = Basic Salary + Dearness allowance under the terms + Commission

at fixed percentage
Gratuity -----------
-
received
Less :-
1. Gratuity received ----------
2. No. of Completed year x Preceding 10 month average salary ---
------ (-) --------
Whichever ---
2
3. Maximum limit Rs. 10,00,000 ----------
is less
Taxable ------------
Gratuity
Note:- Salary will be calculated on the basis of last months receipts
(4) Earned Leave Salary:-

(A) Government employee – Fully exempted
(B) Non Govt. employee –
Salary = Basic salary + D.A. under the terms+Commission of fixed percentage
Salary received for earned ------------

leave Less :-
1) Salary received for earned leave ----------- Whichever
2) Salary of approval period -----------
3) Salary of 10 months ----------- is less will (-) ----------
4) Maximum limit Rs. 3,00,000 ----------- be -
Taxable earned leave Salary ------------
Note:- Salary will be calculated on the basis of last to month’s average salary.
(5) Compensation on Retrenchment
Salary = Basic salary + Allowances Taxable + All taxable perquisites
Compensation received ------------

Less :-
1) Compensation received -----------
2) Salary of 15/30 days on Whichever
the completed year of service (-) ----------
(under industrial dispute act 1947) ----------- is less -
3) Maximum limit Rs. 5,00,000 -----------
Taxable ------------
Amount
Note:- Salary will be calculated on the basis of last 3 month’s average salary
(6) Amount received from provident fund:-
Amount received from statutory P.F. and Recognised P.F. will be fully exempted but
amount received from unrecognised P.F. will be taxable as under-
(i) Employer’s share with interest will be taxable in the head of salary
(ii) Interest on employee’s share will be taxable in the head of other sources.
INCOME FROM HOUSE PROPERTY
The second head of Income is income from house Property. In this head of income, we compute
the income received by an assessee from the house owned by himself. There are some
incomes which arise from house, Owned by the assessee, but not to be included in this head:
1. Income from staff-quarters.

2. House used by the assessee for his own business or profession.
3. House Let out to government authorities for police station, fire brigade, bank, insurance
company etc. for taking assistance in the business.
Similarly, income from subletting house or sub-tenancy will not be the part of this head.
Exempted Income from house properties:
Some incomes are been declared exempted which have arisen from house properties.
1. Income from self-residential house

2. Income from official residence of former rulers.
3. Income of some social & charitable institutions.
4. Income from agricultural farm house.
From the Income-tax point of view, house properties can be classified into 4 parts:
1. Self-Residential House:
Computation of Income from House Property Assessment year 2018-19
Gross Annual value of self-occupied house NIL

Less: Interest on loan (Rs. 30,000/ Rs. 2,00,000)
--------
Income from House Property
--------
2. Let-Out
House:
Computation of Income from House Property Assessment

year 2018-19
B.Com. V Sem (Hons) Subject- Income Tax Law And Practice
Gross Annual --------

Value Less: Municipal (-) --------
Taxes
--------
Net Annual Value
Less: Deduction u/s 24:
(i) Standard deduction (30% of N.A.V.) -------- (-)--------
(ii) Interest on loan -------- --------
Income from House Property (Taxable)
3. Partly let-out & Partly self-occupied House:
4. Some part of the house is self-occupied for the whole year and remaining portion is
let out for some period by self-occupies for the remaining period:
2/3 10 months
Self-occupied Let out
2 months
Self-
occupied
While doing valuation in this case, actual rent will be calculated of the whole house for the
let-out period only. But, fair-rent and municipal-valuation will be taken for the whole year
45, Anurag Nagar, Behind Press Complex, Indore (M.P.) Ph.: 4262100, www.rccmindore.com
22
B.Com. V Sem (Hons) Subject- Income Tax Law And Practice
UNIT-III
Income from Business/Profession
Third important head of the income is ‘Profit and gains of business or profession. Major part of the
revenue is collected by income tax department from the tax payees engaged in business activities.
Meaning of Business- Sec. 2 (13)
Business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade,
commerce or manufacture.
“Profession” includes ‘Vocation’ Sec. 2 (36)
Profession- The expression Profession involves the idea of an occupation requiring Purely intellectual
skill or manual Skill controlled by the operator as distinguished from an occupation or business which is
substantially the production/ sale/ arrangements for the production or sale of commodities.
Vocation: In the act, It implies natural ability of person for some particular work. In the other words by
the way in which a man passes his life.
Profits and Gains of business/ Profession include-

1. Profit from trading activities
2. Compensation
3. Receipts from Profession
4. Profit from speculation business
5. Brokerage
6. Commission
7. Import-export Incentives
8. Income of trade Associations
9. Royalty etc.
Traders, Manufactures, Suppliers, banks, insurance Companies transporters, lawyers, doctors,

engineers, singers, insurance agents, trade Associations, money lenders etc. are covered under this
head.
The following conditions should be fulfilled for allowing deduction under the Section-
1. Expenditure must be in revenue nature, capital expenditure is not allowed.
2. Expenditure must be related to business/profession.
3. Expenditure must be actually made reserve/provision made for any expenses is not allowed.
4. Expenditure must not be personal/Domestic
5. Expenditure must be paid/ payable during the year.
Computation of income from business assessment year 2016-17
23
B.Com 5th Sem. (Hons.) Subject- Income Tax Law & Practice
Net profit as per P & L a/c or surplus as per income & exp. a/c
Add- Disallowed expenses & Losses debited to P&L A/c:
1. Household expenses/ Personal expenses
2. Life insurance premium
3. Int. on capital
4. Income tax & wealth tax
5. Capital expenditures & capital losses/ Speculations
6. Fees & penalties (except penalty in the form of interest for late payment of sales tax)
7. Reserves & provisions (except prov. For payment of excise duty)
8. Capital expenditure on advertisement expenses new sign board.
9. Adv. In souverior of political party.
10. Donation to political parties
11. Charities & donation (except compulsory subscription for business)
12. Personal gifts & presents
13. Cash payment exceeding Rs. 20,000 of the whole amt. will be disallowed.
14. Payment outside India without TDS
15. Excess payment to relatives
16. Excess dep. Charged in P & L a/c
17. Irrelative exp. Of business
18. Fringe benefit tax (FBT)
19. Securities transaction tax (STT)
20. Income tax on perquisites
21. Valuation of closing stock
22. Exp. On intangible assets like patents copyright, know how etc. (25% dep allowed on
it)
23. Preliminary expenses (4/5 th disallowed)
24. Exp. On prospecting of minerals (9//10 disallowed)
25. Exp. On family planning program
26. Provision for Gratuity [u/s 40 A (7)] (+) –
Total -
Less- Allowed expenses and allowances which are not debited to P&L A/c
wholly/partly for instance depreciation:
1. Allowed bad debts
2. Allowed depreciation
3. Any other allowed expenses (-) -
4. Banking cash transaction tax
Less : Income not related to business but credited to P&L A/c: -
1. Rent from house property.
2. Selling price/profit from sale of assets.
3. Interest and dividend
4. Int. on post office savings a/c
5. Income tax refund
6. Agricultural income
7. Bad debts recovered which were previously disallowed as bad debts
8. Personal/ Family Gift (-) –
Add : Add- deemed income which are not recorded in the books: (+) –
Taxable Income from Business/ Profession -------
Deductions expressly allowed in respect to expenses and allowances (sec. 30 – 37)
24
1. Rent, taxes, insurance, repairs etc. of the building: If an assess is running his business in a
rental house, then rent and all other expenses will be fully allowed. But if the business is
running in own house, then rent will be fully disallowed and other expenses will be allowed
proportionately. (Sec. 30)
2. Repairs & insurance of other assets: If an assessee has taken insurance of plant & machinery,
furniture, motor car etc. or spent on repairs of these assets, then the whole amount will be fully
allowed. (Sec. 31)
3. Depreciation: (sec. 32) depreciation will be allowed on all those assets at prescribed rates,
which are allowed by the assessee and are used in business of profession
Dep. On leasehold assets will not be allowed and also on foreign cars.
Dep. Will be allowed on any asset only when it is existing the business on the last day of the
previous year Mar’31, 10. If an asset has been sold or destroyed before this date, then dep. Won’t be
allowed on such asset.
If an asset is used for a period. of 180 days or more in an year, then only dep. Will be allowed for
the whole year. But, if an asset is used for less than 180 days in a year, then dep. will be allowed at
prescribed rate for the half year.
Dep. is to be calculated on the WDV of the asset which will be calculated As under:
WDV on 1st Apr. 09 ………
(+) Cost of new asset purchased (+) ………
Total ……….
(-) Sales Price of the asset sold (-) ………
WDV on 31 Mar.010
st ………
Following are the prescribed rates of depreciation on some of the important Assets.
i. Residential Building 5%
ii. Commercial Building 10%
iii. Furniture 10%
iv. Motor Car 15%
v. Scooter, motorcycle 15%
vi. Plant & Machinery 15%
vii. Intangible assets like patent, copyright, know how etc 25%
viii. Computer 60%
ix. Professional books :
a) Books annually published 100%
b) Other books 60%
20% additional dep. will be allowed on assets purchased during the previous year. But assets use for
less than 180 days rate of additional depreciation will be 10%
4. Expenditure on scientific research: Every amount of such expenditure, whether it is capital or
revenue, will be fully allowed. (Sec. 35)
5. Contribution to national laboratory: Weighted deduction of 200% will be allowed. [Sec.
35(2AA)]
6. Patents, copyright, technical know how: Exp. On them exp. On various intangible assets like
patent, copyright license, trademark, know how etc. will be treated as capital expenditure
hence it all be disallowed if it is written in P & L a/c (Sec. 35 A & 35 AB) Being a capital
expenditure, 25% dep. Will be allowed on it. (If intangible assets acquired after 31/3/98). In
case of Patent/ copyright acquired before 1/4/1998 it would be allowed in 14 years equal
installments.
7. Preliminary Expenses: They are allowable in 5 equal annual installments. It means that every
year, 1/5th will be allowed & 4/5 disallowed. (Sec. 35 D)
8. Expenditure on prospecting of minerals: Allowable in 10 equal annual installments i.e. every
year 1/10th allowed and 9/10th disallowed. (Sec. 35 E)
25
9. Exp. On family planning programs: If some amount is spent by the assessee on family planning
programs of employees, allowed fully capital expenditure is allowed 1/5 portion and revenue
expenditure whether it is capital or revenue expenses will be fully disallowed. [Sec. 36 (i) (ix)]
10. Payment for rural development program: This expense will be allowed fully only when the
payment is made to an approved institution. (Sec. 35 CCA)
11. Security, transaction Tax
12. Other deduction (Sec 36) Insurance Premium, Bonus Bad Debts, Commission, Interest on
capital, Contribution to P.F./ Gratuity fund
13. Tea, coffee & rubber Development Account (Sec. 33AB)
14. Examples of expenditure allowable as a deduction u/s 37 (1)
I. Expenses relating to sale- purchase/ Manufacturing
II. General expenses for running business.
III. Remuneration to employees
IV. Compensation/ damages
V. Legal expenses
VI. Indirect Taxes
VII. Expenditure on raising loans
VIII. Expenditure on advertisement
IX. Other expenses are allowed as per business needs
a. Guest house Expenses, Entertainment expenses, advertisement, travelling etc.
b. Telephone deposit and installation changes.
c. Expenditure on labour welfare
d. Subscription/ contribution/ fees paid to any institution in the interest of business.
e. Office expenses, Royalty, Commission, brokerage etc.
f. Civil defence expenses
g. Expenditure on training of employees/ apprentices
h. Rebate or discount allowed to customers
i. Professional tax levied by state Govt.
j. Express incurred on the occasion of Diwali Muhurat, Business anniversary/ exhibition, festival etc.
k. Interest paid for delay payment of sales tax etc.
l. Fees/ Remuneration to tax consultant/ Advocate
m. Expenses related to tax procedure/ registration of trade mark to promote family planning among
the employees.
n. Some losses are allowed like- destruction of stock due to fire, theft or war, embezzlement by
employee etc. Any other expenses/ losses related to business which is in the revenue nature
o. Audit fees
p. Taxes imposed by local authority
Allowable losses: following items of losses are allowable in the head of business or profession.
a) Lost of cash or stock due to embezzlements by employees
b) Lost of cash or stock due to theft or robbery.
c) Lost of stock due to war or natural calamity
d) Lost of lapsation of advance
Deductible expenses on actual payment: Following expenses will be deductible if it is paid before
due date of filing income tax return. These expenses are issued. [Sec. 43 (b)]
a) Govt. dues- (Tax/ duty etc.)
b) Bonus, comm. etc. payable to employees
c) Interest on intuitional loan.
d) Contribution to P.F.
26
Deemed Profits (Sec 41)

It is deemed to be income from business under Income tax Act
1. Remission of liability/ Recoupment of Loss/ Expenditure
2. Amount realised on transfer of an asset used for scientific research
3. Recovery of Bad Debts
4. Amount withdrawn from special reserve by financial institution
5. Receipts after discontinuance of business
Methods of Accounting (Sec. 145)

Accounting system adopted by the assessee should be considered while computing income from Business.
Books of account may be maintained either mercantile system or cash system-
a. Mercantile System- If an assessee keeps his books of account on the basis of mercantile system
then net profit / loss of business will be determined after making necessary adjustments (any
income/ expenditure will be taken in computation which is related to the previous year either it is
paid/ unpaid, received/ receivable)
Income- Income received during the year
Add- Accrued income
Less- Unaccrued income
= Net income related to previous year.
Expenditure- paid during the year

Add- Due but outstanding
Less- Prepaid/ Advance Expenses
= Net expenditure related to previous year.
b. Cash system- In this system all revenue receipts will be included in the income which are received
during the year on the other hand all revenue expenses which are paid during the year will be
deducted from gross receipts. In cash system no adjustment in respect of accrued, unaccrued
income/ outstanding, prepaid expenses will be considered.
Computation of Income Relating to specific Business

Ascertainment of taxable income is typical in case of some business activities like retail trade, small
transports and contractors, therefore. Special provisions have been made to assess the taxable income of
such specific business an estimation basis under the Income tax act. These provisions are optional. If the
assessee does not want to assess his income related to specific Business under these Provision,- he must to
maintain regular accounts and gets audited them.
I. Special Provisions for Computing Profits and gains of small business of civil construction,
etc. [Sec. 44AD]
1. Gross receipts not more than Rs. 1 Crore (Paid/ Payable)
2. Deemed profit equal to 8% of the gross receipts paid/payable in previous year
3. Deductions of business head not allowed
4. Maintenance of books and audit is not compulsory
5. In case if the profit is less than 8% provisions of sec. 44AD shall not apply where the assessee
claims and produces evidence to prove this then the Assessing officer shall proceed to make an
Assessment of the total income/loss and determine the sum payable by the assessee. Assessee has
to keeps and maintains such accounts Books and other documents as required u/s 44 AA &
furnishes a report of such audit as required u/s 44AB.
6. The Assessee will entitle for deductions u/s 80 c to 80 u against GTI.
7. If the assessee is a firm the salary and interest paid to its partners shall be deducted from their
income computed u/s 40 (b)
II. Special Provisions for Computing Profits and gains of business of plying, hiring or leasing
goods carriages [Sec- 44AE]
27
1. In case of an assessee who owns not more than 10 (at any time in the Previous year) goods
Carriages
2. Estimated profit on heavy goods vehicle or light vehicle shall be an amount equal to Rs. 7,500 (A.Y.
2018-19) for per month or part of a month.
3. Further deductions are not allowed.
4. Maintenance of books and audit is not compulsory.
5. If assessee shows income lower than a foresaid limit sec. 44AF shall not apply where the assessee
claims and produces evidence to prove this then the assessing officer shall proceed to make an
assessment of the total income/loss and determine the sum payable by the assessee. Sec 143 (3)
Assessee has to keeps and maintains such accounts Books and other documents as required u/s 44
AA & furnishes a report of such audit as required u/s 44A
6. If the assessee is a firm the salary and interest paid to its partners shall be deducted from their
income computed u/s 40 (b)
III. Expenses deductible from commission earned by insurance agents etc.

Adhoc deduction from commission earned by insurance agents, UTI agents, Mutual funds agents and Govt.
securities agents are allowed as under when given 2 conditions are fullfil by assessee-
1. If agent who do not maintain detailed accounts for expenses incurred of Agency
2. If gross aggregate commission should be less then Rs. 60000 during previous year.
Commission Adhoc Deduction
1. Agent of LIC of 50% of commission
 First year’s commission
 Renewal commission 15% of renewed commission OR
maximum limit 20000, whichever is less.
 When first year and renewal commission 331/3% earned during the Previous Year
separate figures are not available
 Bonus commission No Deduction allowed

2. Commission received by authorized 50% of commission
agents of unit trust of India
agents of Govt. & Post office securities
agents of notified mutual fund
28
Income from Capital Gain

Meaning of capital gains (Sec. 45)
Any profit or gain arising from the sale or transfer of a capital asset is chargeable to tax under the
head “Capital Gains”, Capital asset means any movable or immovable asset like land, building, plot, gold,
silver, jewellery, shares, securities etc. Profit/Loss arising from transfer of such assets is compared under
the had of capital gain from Income tax point of view.
Definition of Capital Asset Sec-2 (14) -

Capital asset means property of any kind, whether fixed or circulating, movable or immovable,
tangible or intangible e.g. land, building, plot, gold, silver, precious metals, jewellery, shares, securities,
furniture, machinery etc.
Exception –
1. Though Property of any kind held by an assessee whether or not connected with his
business/profession is included in the definition of ‘Capital Assets’ it does not include –
1. Stock in trade
2. Personal effect Assets (which is personally used by assessee and family member)
3. Agricultural land in rural area
4. Gold Bonds
5. Special Bearer Bonds Which is issued by Central Government
6. Gold deposit bonds
2. Items included under capital gains Sec. -45

1. Profit from transfer of Capital Assets Sec. 45 (1)
2. Insurance Claim Sec. 45 (1A)
3. Conversion of Capital Assets into stock in trade Sec.45 (2)
4. Assets transferred to Firm/AOP Sec. 45 (3)
5. Profit from distribution of capital assets on dissolution Sec. 45(4)
6. Profit arises from compulsory acquisition of capital Assets. Sec. – 45 (5).
7. Capital Gain on repurchase of units of Mutual Fund Sec. 45 (6)
Types of Capital Gains

1. Short term capital gain
2. Long term capital gain
Short term capital asset

(i) Shares, securities, bonds, units are held by the assessee for not more than 12 months before
transfer.
(ii) Assets on which deprecation has been allowed under the Income Tax Act, whether depreciable
asset held by the assessee more or less 36 months.
(iii) Any other asset which is held by the assessee for not more than 36 months, e.g., land, building,
precious metals, jewellery etc.
Long term capital asset

(i) Shares, securities, bonds, units held by the assessee for more than 12 months.
(ii) Other assets like building, gold, plot, land, jewellery etc. held by the assessee for more
than36 months.
29
Computation of Short term capital gain/loss (For the Assessment Year 2018-19)
Sales consideration ………
Less – Aggregate amount of the following:
(a) Transfer Expenses (Advertisement).

Brokerage, legal exp. etc) ……….
(b) Cost of acquisition of the asset ……….
(c) Cost of improvement ……… (-)……..
Short term capital gain/less ………..
Computation Of Long Term Capital Gain/Loss (For the Assessment Year 2018-19)
Full value of consideration
Less : Total of the following ………
(i) Transfer expenses ……….
(ii) Indexed cost of acquisition ……….
(iii) Indexed cost of improvement ………. (-)……
Long term capital gain/loss ……….
Formula:-
1. Calculation of Index cost of acquisition
(i) If assets acquired before 01.04.1981 by the Assessee
Original Cost or fair market value on × Index for the transfer year 2015-16(1081)
Index Cost = 1.4.1981 (which ever is more)
Cost inflation Index for 1981-82 (100)
(ii) If assets acquired on 01.04.1981 by the Assessee
Cost of acquisition × Index for the transfer year 2015-16(1081)

Index Cost = Cost Inflation Index for the year in which the assets is acquired by the assessee
Note:- If the property is acquired before 1.4.81 then index for 1981-82 will be taken as index for the base
year.
30
2. Calculation of Indexed cost of improvement

Formula:-
Cost Inflation index for the year in which
Cost of Improvement x
the asset is transferred year
= Cost Inflation Index for the year in which
Improvement to the asset took place.
Note:- Improvement cost incured before 1.4.81 is not considered. It should be lgnored. Only cost of
improvement will be considered which is related after 31.3.81.
Exemption of Capital Gains

Exemptions are of two types
A. Exemption of capital gains under various sub-clauses of section 10;
1. Capital gain on transfer of units of US 64 exempt [Section 10 (33)]
2. Exemption of long-term capital gain arising from sale of shares and units and Securities
Transaction Tax paid [Section 10(38)]
3. Capital gain on compulsory acquision of urban agriculture land-Sec. 10(37)
B. Capital gains exempt from tax – Under section 54 to 54H

(i) Residential property converted in new residential property Cost of new land or capital gain
(Sec.54) within 3 years or before 1 year or after 2 years (which ever is less)
(ii) Agricultural land transferred and another agricultural land Cost of new land or capital gain
purchased within 2 year (Sec. 54B) (which ever is less)
(iii) Compulsory acquisition of land and building of industrial

undertaking (Sec. 54D) Cost of new land building or
capital gain (which ever is less.)
(iv) Capital gain is invested in notified bonds (Sec. 54EC)
NABARD, Rural Electrification Corporation Bonds, Invested amount within 6
National Highway Authority of India etc. months
(v) Other capital gains invested in residential property

(Sec. 54F) Proportionate Exemption
= Capital gain x Cost of new house
Net consideration
(vi) Shifting of industrial undertaking from urban area to other area

(Sec. 54G) or SEZ (Sec. 54GA) Upto the cost of new industrial
assets.
(vii) Capital gain on transfer of residential house property
(sec.54GB)- w.e.f. of A.Y. 2016-17 a new exemption is
available to an individual or a HUF in respect of LTCG
gain. If assessee invest net consideration or part in
equity shares before due date of furnishing the return,
in eligible company it least 5 year he shall entitled exemption as
under_
Invested amt in new equity share Calculated Amount
________________________________________=
Net consideration *capital gain
31
Important Points
 Personal effect (clothing, future, utensils, vehicles etc.), Rural agricultural land, stock-in-trade,
Gold Bonds, are not covered under the identification of “Capital Asset”. So, profit or losing arising
from the transfer of such assets is not noticeable.
 Depreciable assets will be treated as short-term asset even if such asset is held by the assessee for
Less than or more than 36 months.
 Indexed cost will not be allowed for the following long-term assets-
(i) Securities, Bonds, Units and debentures of company.
(ii) Listed shares of an Indian company sold outside Stock Exchange and the assessee want to pay
tax @ 10% for long term capital gain instead of 20%
(iii) Non-resident assessee opts taxation u/s 115C to 115I in respect of foreign exchange assets.
Calculation of cost of Original Shares & Bonus Shares

Bonus shares means shares allotted by a company to its existing share holders without any consideration.
An assessee holds shares of a company and thereafter the company allotted him bonus shares on the basis
of holding.
1. If original shares acquired before 1 April, 1981
The cost of actualisation will be taken-
Actual Cost of original shares
or
market value on 1.4.81, whichever higher is cost
2. If the original shares acquired after 1 April, 1981
Cost of actualisation will be actual cost
3. If the bonus shares acquired before 1st April, 1981

Cost of Bonus Shares – Market value on 1 April, 1981
4. If the Bonus shares acquired after 1 April, 1981

cost of Bonus Shares – Nil
32
: Income from other sources
This is the last and residual head of charge of income. An income which does not specifically fall
under any one of the preceding four heads of income (viz Salaries. Income from house property, Profits
and gains of business or profession or Capital gains) is to be computed and brought to charge under
section 56 under the head Income from other sources.
COMPUTATION OF INCOME FROM OTHER SOURCES
S.No. Items Taxability

1. Dividend on shares
(i.) Dividend from domestic company Exempt
(ii.) Dividend from units Exempt
(iii.) Dividend from non domestic company or co- Taxable as it is
operative society
2. Interest on securities
(i.) Interest on tax free Govt. securities Exempt
(ii.) Interest on less tax Govt. securities Taxable as it is
(iii.) Interest on commercial securities
(a) If gross interest is given Taxable as it is
(b) If interest is given net and amount is more than Int. x 100
Rs. 5,000 on listed debentures Gross 90
(c) Interest on tax free commercial securities
(i) Listed debentures of a company Int. x 100
Gross 90
(ii) Unlisted debentures of a company Int. x 100
Gross 90
(d) Interest on Semi Govt. securities Gross Interest taxable

3 Interest on Bank Deposit – up to Rs. 10,000 Taxable as it is
If interest is more than 10,000 and given net, such Int. x 100
amount will be grossed up. Gross 90
4 Co-operative interest and dividend Taxable as it is
5 Interest on company deposits or firm’s deposits
(i) If interest amount is upto Rs. 5,000
(ii) If net interest is more than Rs. 5,000 Taxable as it is
Int. x 100
Gross 90
6 Lottery
(a) If the prize amount is given and Fully taxable
(b) If net amount is given and such amount is more Net amount x 100
than Rs. 5,000 70
7 Horse race income Fully taxable
8 Causal income Fully taxable
9 Royalty, director’s fees, article income, exam. Received income (-) expenses
Remuneration
10 Family pension Received amount (-) 1/3 or
15,000 whichever is less
11 Income from sub tenant Net income
33
12 Income from machinery, plagt or furniture on hire. Rent received (-) expensed
and depreciation.
13 Agricultural income outside India Taxable
14 Income from non agricultural land in India Taxable
15 Salary of M.P. or M.L.A. Taxable
16 Income from undisclosed sources Taxable
17 Cash gifts : (if the aggregate amount exceeding Rs. Fully taxable
50,000 in a financial year) from other persons except ……………………….
relatives.
Less : Deduction allowed (above mentioned

incomes) Actual amount
(i) Interest Collection charges Actual amount
(ii) Interest on loan Actual amount
(iii) Any expenditure which is incurred by the
assessee to earn such income
Calculation of Income from Sub-tenant

ent received from sub-tenant ……………
Less – Eexpenses allowed :
(i) Rent paid by the assessee for the part which is sub let
out ……………
(ii) Repairs and other expenses paid by the assessee
regarding such part …………. (-)…………..
Income from sub tenant ……………..
34
UNIT-IV
Set off of losses and Carry Forward : Chart

Heads of Income Set off of Losses during current Carried forward and set off in
previous years subsequent years
1. Loss from house Firstly setting off against another Any income under the head Income
property house property income and if from house property upto 8
(whether self required, from another heads of subsequent assessment years
occupied or rented) income.
2. Non speculation Firstly setting off against another Any income under the head ‘‘Income
business loss business income and if business from Business or profession” upto
income Is not sufficient then another subsequent 8 assessment years.
heads of income , except income from
salary.
3. Speculative Only against another speculating Only against speculative income
business loss profit. If any under the head ‘‘Income from
business or profession” upto
subsequent 4 assessment years.
4. Short term Any Income under the head ‘Capital Any income under the head ‘Capital
capital loss gain’ either short-term or long-term. gains’ upto subsequent 8 assessment
years.
5. Long term capital Only against long-term capital gain. Only against long-term ‘Capital
loss gains’ upto subsequent 8 assessment
years.
6. loss from the Only against income from the activity Only against income from the
activity of owning of owning and maintaining horse activity of owning and maintaining
and maintaining race. race horses upto subsequent 4
horse race assessment years.
7. Unabsorbed Unabsorbed depreciation can be set
depreciation of any off against income of any head
period (except salary income). There is no
time limit for set off.
Chart : Deducting from Gross Total Income
Section Name of deduction Eligible person Rate of deduction

80C Contribution or payment for Individual and HUF Aggregate maximum
Life insurance, SPF, RPF, PPF, deduction allowed u/s
NSC, Mutual Fund, 80C, 80CCC and 80CC
repayment of house loan, Rs. 1 Lac.
tuition fee etc.
80CCC Contribution to LIC pension Resident individual
fund (max. Rs. 1 Lac)
80CCD Contribution to pension Central Govt. or other
fund employee’s and Govt. or employee appointed on/or
employers Contribution. after 01.01.04
(up to 10% of salary of each)
80D Medical Insurance premium Resident Individual or HUF (i) Self, spouse and
children
35
Rs. 15,000
(ii) Parents-maximum
Rs. 15,000
(iii) Family member of
HUF Rs. 15,000.
Add- In case senior citizen
up to Rs. 5,000 extra for
(i),(ii) &(iii)
80 DD Treatment and deposits for Resident individual & HUF Fixed deduction
disable dependent Rs. 50,000(Rs.1 Lac in
revere case)
80DDB Expenditure on serious Resident individual or HUF Actual expenditure or
diseases maximum
Rs. 40,000
80 E Payment of interest of higher Individual Actual amount of interest
education loan
80G Donation to Funds or Every person 50% or 100% of donation
Charitable institution as per provisions
80GG Rent paid Individual (a) Excess rent 10% of
toatal income
(b) 25% of total income
(c) Rs. 2,000 p.m.
Whichever is less.
80GGA Donation for Scientific Every person who has no 100% of contribution
research income from business
80GGB Contribution to political Company, firm, HUF, 100% of contribution
& GGC party individual etc.
80IA Infrastructure undertakings Company 100% of profit
(10yrs.)
Power, Industrial park
Every person 100% (10 yrs.)
80IB New undertakings profits Every person Company 30% other 25%
established during for 10 years
prescribed date
80JJA Bio degradable waste -do- 100% of profits
business
80JJAA Employment of new Indian company 30% of additional wages
workmen
80 QQB Royalty income of authors Resident Actual Royalty or
maximum Rs. 3 Lac
80U Person with disability Individual Fixed amount Rs. 50,000
revere disability Rs. 1 Lac.
36
Unit V
Computation of Total Income of an individual assessee

Assessment year 2018-19
I. Income from Salaries
(a) Basic salary, bonus, commission, D.A. and
other taxable allowances. …………..
(b) Taxable perquisites …………..
(House, Gas-electric, servants etc.)
(c) Any other receipt from employer Gross Salary ……………
Less- Deduction u/s 16

(1) Entertainment allowance
(Govt. employee up to 5,000, Non-Govt.-Nil …………
(2) Professional tax (actual amount) paid during
the previous year 2015-16 ………… (-) ………… ……
II. Income from house property

(a) Let out properties :
Annual Rental Value
municipal value for fair
rent or actual rent
whichever is more .……….
Less- Municipal Tax paid (-) ………...
Annual value
………..
Less- Deductions :
(i) Standard Deduction
@ 30% of A.V. …………
(ii) Interest on loan (paid or due) ........... (-) ………… ………..
(b) Self- occupied house

Annual rental value Nil
Less- Deduction for interest on loan if the
loan
Is obtained-
(a) Before 1.4.99- Actual interest or (-) ………..
Rs. 30,000, whichever is less. ………..
(b) After 31.3.99- Actual interest or
Rs. 1.5 lac, whichever is less
(c) Loan for repair or renovation – Actual
interest or Rs. 30,000 whichever is less
III. Income from business or profession ………..
Net Profit or surplus
Add- Disallowed expenses recorded in P&L
account i.e., any type of reserve,
donation, capital expenditure,
personal expenses, Income Tax etc. (+) ………….
Less- Allowed expenses which are not
Included in the books, e.g. allowed
37
depreciation, bad debts etc. (-) …………

Less- Other incomes which are credited to
P. & L. account but not related to
business, e.g., house rent, interest,
dividend, capital receipts etc. (-) ……….. ………….
IV. Capital Gains
(a) Short term capital gains
(shares, securities etc. up to 12 months and
other assets upto 36 months)
Sales consideration n ………….
Less- (i) Cost of acquisition ………….
(ii) Cost of improvement ………….
(iii) Transfer expenses …………. (-) ……….
(b) Long term capital gains ……….
(shares, securities etc. more than 12 months
and other assets more than 36 months)
Sales consideration ………..
Less- (i) Index cost of acquisition ………….
(ii) Index cost of improvement ………….
(iii) Transfer expenses …………. (-) ………… …………
V. Income from other sources
Interest on Govt. securities, bank interest, other
Interest, royalty, fees, subtenant income etc.
Gross Total …………
Income
(A) Tax @20% on LTCG ……………..

(B) Tax @30% o casual Income ……………..
(C) Tax on other incomes
Tax rates for individual
First 2,50,000 NIL

On Next Rs. (2,50,001 5,00,000) 5% …………………
On Next Rs. (5,00,001-10,00,000) 20% …………………
Above Rs (10,00,000) 30% …………………
Senior Citizen (60 years or more but less than 80 years)
First 3,00,000 NIL

On Next Rs. 3,00,000 (3,00,001-5,00,000) 5%
On Next Rs. 5,00,000 (5,00,001-10,00,000) 20%
Above Rs 10,00,000 30%
Super Senior Citizen (80 years or more)

First 5,00,000 NIL
5,00,001-10,00,000) 20%
Above Rs 10,00,000 30%
38

Hons III Year Income Tax Law PracticeH Final

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B.Com (Hons.

) III Year Subject- Income Tax Law & Practice

Class – B.Com. (Hons.) III Year

Subject – Income Tax Law & Practice

Unit-I General introduction of Indian income tax act, 1961. Basic

Unit-II Income from salary, income from house property.

UNIT – III Computation of taxable income from business of profession.

UNIT – V Procedure for computation of total income (taxable income) of

SALIENT FEATURES OF INDIAN TAX SYSTEM

(i) Salaries (Cash receipts and perquisites from the employer),

Basic concepts of Income Tax

Salient Features of Income Tax-

Income [Section 2(24)]

Definition of Income [Section 2(24)]

1. Profit and gains;

Agricultural Income [Section 2

Sec. 2(1A) defines “agricultural income” to means –

Partly Agricultural Income Shown by Chart

Income connected with land but not agricultural income –

1. Profit earned on purchasing the standing crop.

Agricultural Income and Tax Liability –

Condition for Integration -

When the following two conditions are satisfied-

4. ASSESSMENT YEAR : (2018-2019)

5. PREVIOUS YEAR (Section 3)(2017-2018)

1. Where a different accounting year is followed

1. Shipping business income of non-resident ship-owners

PERSON [SECTION-2 (31)]

ASSESSEE [SECTION-2 (7)]

(a) Every person:

(c) Who is deemed to be an assessee in default?

GROSS TOTAL INCOME

(vi) Salaries (Cash receipts and perquisites from the employer),

BASIS OF CHARGE (TAX RATE)

A. EXEMPTED INCOME FOR ALL ASSESSES

Actual Amount Received or

Amount Prescribed or Which ever is

5. Amount received as leave encashment on retirement Sec.-10 (10AA)

C. EXEMPTED INCOME FOR INSTITUTIONS

D. EXEMPTIONS FOR NON-RESIDENT /FOREIGN CITIZEN

E. EXEMPTIONS FOR OTHERS

RESIDENTIAL STATUS AND TAX LIABILITIES

EXCEPTIONS TO THE BASIC CONDITIONS

ii) Additional Conditions

i) An assessee must have been assessed as resident for at least 2 out of

FIRM OR ASSOCIATION OF PERSONS

ii) It is controlled and managed wholly within India.

a) Tax liability of Resident

INCOME FROM SALARY

Computation of Income from Salary

Assessment Year 2018-19

(A) Cash Receipts

Deduction form Gross Salary

(1) Entertainment allowance u/s 16(ii) :- This deduction is allowable only to

Salary = Basic Salary :-

(i) Allowance received

Actual Payment will be deductible.

Rules regarding partly taxable allowance

3) Tribal area allowance:- Exempted up to Rs. 200/- P.M.

Whichever is less is exempted

7) House Rent allowance:-

Allowance received ----------------

8) Under Ground Allowance : - Exempted upto Rs. 800 Per Month